Epic Real Estate Investing - How Real Estate Creates Wealth and Moguls | 560

Episode Date: January 4, 2019

If you have ever wondered how real estate creates wealth and moguls, you should stay with us because, today, we are laying out the 5 reasons as to what makes real estate so special. Learn how investing mitigates your biggest expense, what the cash flow return is, and how leveraging multiplies your annual percentage rate. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Hey, Rockstar, Matt Terrio here. Just curious, have you ever wondered how real estate creates wealth? I mean, why has it produced more wealth and millionaire and billionaire moguls than anything else? I mean, with there's so many other investment options available, how does it do that? What makes real estate so special? Well, today I'm going to give you five reasons as to how real estate creates wealth and moguls on this episode of Financial Freedom Friday. Oh, and this is not going to be Robert Kiyosaki's cash flow quadrant in case you're wondering.

Something so much more exciting. So how real estate creates wealth and moguls is really pretty simple. And its simplicity is probably a part of what makes it work for so many people. It's simple, meaning you don't have to really think too much. By simply just owning income-producing real estate, wealth just, it happens. And I'm going to give you five reasons as to how it happens. and there are more than five, but I'm going to give you the primary five. First, it mitigates your biggest expense in life.

And this is important for any investment. As the most successful investors, they're going to tell you, investing isn't necessarily all about how much you make when your investments go right, although that's important, but it's also very much about how much you lose or don't lose when things go wrong. And whether a real estate investment performance, forms or doesn't, you still get the benefit of the depreciation and the deductions. I'll just abbreviate it there, depreciation.

And what this means is when things go wrong, your losses are minimized. And when things go right, your wins are maximized. Now, this is a smaller ROI, but it's still a return on investment. Let's just say, I don't know, 1% annually to keep this really simple and conservative. You know, most people don't even recognize this because it's not money coming into their bank account each month. It's money that's not going out of their bank account, and they take that for granted. But it is indeed a return on investment, okay? The second one is cash flow.

Cash flow. You see, when you lease your real estate to someone for the right to use it, you receive income. They pay you for that right. And from that income that you receive that they give you, you then pay the property's expenses, and you get to keep what's left over. And that's called cash flow. And this is a much more noticeable return because it's money that shows up in your mailbox every month. All right. So a very conservative number, say, I don't know, today's market, doesn't really matter with the market conditions, but a very conservative number, I'd say, is 8%.

Then there is amortization. Amortization. I'm going to abbreviate this too with Amor. This is probably the most commonly misunderstood or undervalued profit center of real estate. But one of the more, if not the most powerful one when it comes to wealth creation. You see, if you borrowed money from a bank to purchase the property,

then this would be part of the property's expenses that you'd have to pay each month that debt, right? But people look at as an expense, but it's not really an expense. It's a realization of equity. See, that debt service, it's paying off the loan on the property, transferring more and more ownership to you every month. And this is a big part of what differentiates an investment property from the home that you

live in, your primary residence. You see, in the home that you live in, it's you paying that debt every month. It's you buying your home. In an investment property, it's your tenant that sends you that money every month to take care of the mortgage payment. So it's your tenant that's buying this property for you. And that's what makes this profit center so special and so powerful. And it's the one that people talk about the least. Now, the ROI here in the beginning, due to how an amortization table works, it's really small. But it gets bigger and bigger the longer that you own the property. But in the interest of just keeping everything super conservative, super simple, let's just say it is 1% also. So 1% annually. So the fourth profit center of real estate.

estate is what everybody knows and what everybody talks about is appreciation so this is what most people think of when investing in real estate they're focused on the appreciation they're constantly concerned about whether or not this is going to be a good time to buy they're always trying to time the market meaning they're wondering you know what's the market gonna do next and the truth is nobody knows and when you find that person with that crystal ball I'd be very grateful for that introduction but But the truth is, nobody knows.

And although this is a bona fide profit center, it's a speculative one. It's really, it's the icing on the cake, right? These other three, this is the cake. So maybe the market from appreciation is gonna go up, it's gonna go down, but while it does, or it doesn't, these other three centers are working for you. Now, as the market goes up and down,

historically, the average national appreciation over, I don't know, a 30-year period, is probably right around 3%. So we'll use that number in our equation, just to keep it simple. and conservative. So these are the four or five points of how real estate creates wealth and moguls. So let's add them all up and what do you have? You have a collective annual return of 13 percent. Those are the four out of

five reasons how real estate works so well in creating wealth. But 13 percent. It's not all that much to get excited about, is it? I mean it's respectable, but it's not the silver bullet to creating wealth that you're looking for. There's got to be something else, right? Well there is. It's the fifth reason as to how real estate creates wealth and moguls, it's what's called leverage. And it's this type of leverage that's available inside of real estate. It's not available to the average person in any other mainstream investment. You see, with the use of very basic leverage, let's say you put 20% down, that's customary. You put

20% down to the purchase price, the bank puts in the rest, the 80%. Then collectively, the use of leverage in this example will multiply these other returns by three. Turning this into annual percentage rate of 39% every year. And it actually gets a little better the longer that you own the property, but with, I don't know, with just 39%, let's keep a real conservative and simple. In the first year, 39%, it starts to become pretty clear as to how real estate has created so much wealth for so many people. And if you're a little confused by how I got the math and how I came to all this, I did it in advance. And I actually run down the math in this video right here. You can click this link. It'll take you there. Click this to watch the actual

calculations for each one of these profit centers. Or if you're listening to the podcast, you can go back to episode number 421 as I did the math there too. Now, if you can show me another investment with the historical track record and the math to support 39% annually, and you can rely on that for the next 30 years, let me know. But until then, I'm going to continue doing what I'm doing. It's why I refer to this show as not so much a real estate show. I mean, I don't care about the real estate. I just care about what the real estate does for my money. This is not a real estate show. It's a money show, disguised as a real estate show. And I will see you next week for another episode of Financial Freedom Friday. Take care.

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